Wide Open Spaces in Forex

Hello Forex traders,

Trading with the trend is a very strong and useful concept. In my previous articles on trading with the trend a reference is made to the famous saying: “Go with the flow, ride the tide, bend with the trend” – a quote from Bill Willams. Another famous expression is:

“the trend is your friend” or “the trend is your friend until it bends.”

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I think the point is clear. Take a look at the previous 2 articles to read more on trends:

a)      “how to define trend part 1” 

b)      “how to define trend part 2” 

However, most Forex traders also know that the trend is just part of the equation. How and where do you enter, where to you place the stop loss, where do you take profit, what are filters, how do you define the trend, etc. There are many variables that need to be answered and solved before the concept of trend actually translates into profitability. 

The core point is that even though a currency pair is trending, this does not translate in immediate unconditional with the trend opportunities. In fact, the reality is far from it. Forex traders must judge whether a trend has sufficient space to develop. Not just a little bit of space, but preferably the more the better (more on that later) or in other words: Wide Open Spaces (WOS).

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WIDE OPEN SPACES (IN TREND) – WOS(IT)

Te concept makes perfect sense because the trend is a great tool, but not always will the trend have sufficient space to develop. Why? Because the market environment is not ripe for trend follow through. There could be tons of reasons, for instance:

1)      News events: the release of the FOMC statement which keeps traders on the sidelines until that event.

2)      Price action (momentum / correction): lots of price action occurs in consolidation (70-75% is a common figure) and momentum moves are quick and profitable but occur less often.

3)      Support and resistance: price is constantly battling between support and resistance (S&R). In a trend one side is winning more often, but the probability of that trend continuing is decreasing when approaching a S&R of a higher time frame.

Being able to judge how much widen open space (WOS) is available for price to move up or down is of immense importance. And it is not only important if you are trading with the trend but also for range and reversal traders. The reason why it’s so important is because with the trend traders and range traders are in search of widen open spaces, whereas reversal traders are looking for pairs that do not have WOS (to increase chances of reversal occurring).

Take a look at these articles if you want more information on these topics:

a)      “range trading” 

b)      “reversal trading” 

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THE PROCESS OF WOS

Now that we have clarified the importance of WOS in trading in general, and Forex trading in specific, it is important to understand how the WOS method can be actually implemented in real life trading. What kind of process is needed to use the WOS concept?

In our Forex trading room we use the following steps:

1)      Define the trend (see links a/b above)

2)      Qualify and define the opportunity (within the trend)

3)      Check for filters (that can hinder the trade)

4)      Look for a trigger (which confirms our analysis in the previous steps)

5)      Establish and take the entry signal (which goes through the price level of our choice)

Here is a practical example to make the theory mentioned in the points 1 to 5 livelier:

1)      Trading room: looking for the with the trend continuation setups

2)      Opportunity: looking for pullbacks, consolidations and chart patterns within the trend

3)      Filters: news events, divergence, support and resistance, and Fibonacci levels

4)      Trigger: a trend line or break of trend line

5)      Entry: break of the fractal or Fibonacci retracement level

With the above process, the WET trading room is in search of Wide Open Spaces (WOS).

WOS JUDGEMENT

But that is not the end of the story… The important part of judging whether there is sufficient WOS is by comparing the reward to risk ratio (R:R ratio) of each potential setup.

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That means that each and every trade setup will be judged via the R:R ratio balance. A setup which has a too low value will be filtered out. A setup which has a high enough value qualifies. What levels are considered enough? This depends on your system expectancy, which is the win percentage multiplied by average win, minus the loss percentage multiplied by average loss. But in general:

Reward to risk ratio of lower than 0.7 – too low / no trade
Reward to risk ratio of lower than 1 – WET avoids these setups / only useable in scalping
Reward to risk ratio of lower than 1.5 – possible but not ideal / depends on other factors such as remaining opportunities in the market
Reward to risk ratio of lower than 2 – decent ratio
Reward to risk ratio of lower than 3 – great ratio
Reward to risk ratio of higher than 3 – superb ratio

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Forex traders can measure whether they have proper or improper reward to reward-risk ratio via:

1)      Decide entry price (break or pullback level)

2)      Decide technical stop loss level (using support / resistance / fractal)

3)      Evaluate take profit zone at next support & resistance (1 higher time frame)

4)      Subtract entry from stop loss

5)      Subtract entry from take profit (TP)

6)      Divide calculation of 5 by 4 —> R:R ratio

When aiming for a R:R ration of higher than, Forex traders are usually aiming the TP at a higher S&R. Purposely ignoring the closest S&R is certainly an option to increase the ration, but Forex traders do realize that due the path of least resistance dictates that the success rate of such as a TP decreases. 

Sometimes it happens that an S&R divides a zone in to 2 spaces. In this case the Forex trader can employ the strategy of scaling out, and then scaling back in, thereby reducing the risk of the better TP not being hit.

With this method in hand, Forex traders will always be able to understand, recognize and calculate wide open spaces, and see if there are setups that qualify using the WOS model.

Did you ever think of this WOS concept? If yes, please tell us your experience in using it when Forex trading? If not, how do you think that would influence your trading? Are there elements you would change in your trading? If so, how? Please write down below your comments!

Wish all a wonderful weekend and Good Trading next week!

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  • Randi Raulund

    Good article, must practice this in demo!

  • Robert

    Great article Chris! This concept of trading WOS really helps in simplifying trade setups. You can quickly determine RR and pschologically it can give you confidence to stay in a trade.

  • Wong Jun Jek

    you can profit with 50% or 40% hit rate as long as you have good RR. So, trading WOS where there is much reward being offered is the way to go!

  • Hilton

    One of my biggest issues has always been trying to determine how long to stay in a trade. This often resulted in me clicking out at random levels. I think the WOS concept will greatly help in maximizing pips per trade as it will help set clearer targets for each trade.

  • Paul

    Great article. It definitely helps with understanding the Trading Room Strategy. It will help my trading decisions greatly in the future.

  • Chris

    Hello Fabrice! Also thank you for your comment, much appreciated. Happy to hear that it is a prominant part of your trading. Great job!!

  • Chris

    Hello Nerachos, thank you for your comment. Great stuff. Happy to hear that the concept helps you with gaining an edge!! The R:R potential is always important in judging whether a setup is worth it indeed. Thanks and Good Trading!

  • Fabrice Goeyvaerts

    Hi Chris,
    I pay a lot of attention to WOS. I discovered the concept few years ago on stocks. It was presented by Shane Partridge in a 6 hours free webinar (InfinityTrader – full webinar unfortunately not available anymore). He showed and repeated over and over again that “VOID IS THE KEY”. I guess it’s valid for every markets.

    It can be a trending or a ranging environment, I will always check if there’s VOID or WOS for price to advance before entering a trade.

    Therefore my 1st filter is major support or resistance or TL (major is something relative though as it depends of the TF you are looking at … a daily major support might not be seen on a Monthly chart for ex.) that could be in the way before reaching my Target, then 2nd filter is Risk to Reward ratio.
    Tks for this interesting reading!
    Cheers,
    Fabrice

  • Nearchos

    Great article as usual, thank you Chris. I first heard of the
    concept attending the seminars of Scott Barkleys who’s drawing of the snowman
    was impressive. I also heard and see you, on line, applying the idea of open
    space in the trading room and since then I understood the importance of it. I implement,
    or at least I try to implement the WOS in combination with the R/R ratio rule
    as an extra filter in accepting/declining a potential trade and I can assure
    you that decisions are now easier and I could say my trades are more profitable.
    Thanks again Chris.

  • Chris

    Hi Tunde, that is great! We are glad to hear that this will boost your trading confidence, which is a key element for good trading. Thanks for the comments and wish you awesome trading.

  • Tunde owojaiye

    revealing! the WOS for me gives me a comfortable take profit zone. it definitely will boost my confidence in my trade entry as well.

  • Chris

    Hello Osita, thank you! Happy to hear that! Great that you have been using the WOS concept in the past and I am glad that you have a great method for trading trends and ranges. Great job 🙂 thanks again, Chris

  • Chris

    Hello Gunnar, thanks for your feedback! Happy to hear that you see a value and usefulness of this concept in your trading. It certainly has many advantages. Thanks again! Chris

  • Phoebe Ejimbe

    Great write-up! I’ve always thought and applied the (WOS) concept in trading using Fibonacci and S&R levels for entries and take profits in trending environments. In large consolidations I use candlelstick formations for entries and S&R levels to evaluate TP zones within the relative Wide Open Spaces (WOS). Your article clearly sets out the parameters for working out Risk:Reward ratios. A great help! Many thanks, Chris!

  • Gunnar

    The WOS concept makes sense the way you have described it. It should allow me
    to pick trades, which have a greater chance of winning;
    to decide whether it is worth taking the trade or not;
    to predict the potential gain for the trade; and
    to avoid trades which are likely to reverse direction very early.

  • Chris

    Hello Dave, thanks for the comment! Happy that you find it useful. I agree with you that not all spaces get filled due to other criteria, some of which could be filters indeed. It is not a 100% science but keeping a mental eye on the visual WOS can help with filtering out trades that have little chance indeed. It also gives higher chance to other setups. Thanks, Chris

  • Chris

    Hello Brian, thank you! Happy to read it! Yes I agree with you. Using WOS helps with identifying structure, trend, and R:R; 3 key criteria indeed for succesful trades. Great, thanks for the comments! Good Trading, Chris

  • Chris

    Hello Ivo, I like your thinking process. The trader indeed needs to look through and beyond the signal itself and see if the market is indeed aligned with your strategy. If those are in sync, there is higher chance of succes. Knowing the structure of the market certainly helps a lot in that sense. Great! Thanks and cheers, Chris

  • Chris

    Hello Glen, that is great! Happy to hear that. Using the WOS is indeed very useful for targets. Let me know how its going and thanks for the comment! Cheers!

  • Chris

    Hello Ben! Great to hear that I reintroduced the concept to you 🙂 Hope it will help with making better trading decisions. Thanks for the feedback and comment and Good Trading!

  • Dave Hanna

    Thanks,Chris, for you insightful article. You make it easy to see how critical it is to look for the wide open spaces as targets in placing any trade. Of course, as always, just because there is a wide open space, doesn’t necessarily mean the trade is going to move into it! But if the wide open space is not there, it’s very UNLIKELY that the trade will go very far into it.

  • Brian

    Great article, thanks Chris.

    I like the fact that instead of trading indiscriminately
    on any candle pattern, trading with the trend
    puts structure and direction into your trading plan. With WOS and using
    the support /resistance levels, risk to potential reward is easier to see on
    the chart and low profit, riskier trades can be avoided. I look forward to
    using this in my trading.

  • Ivo

    Hi, the possibility for the swing/trend to materialise is they key to have desired RRR and the RRR is the key of the succesful trading. The focus to the potential of the trade and not only a signal for entry itself is the mental shift everyone had/has/will have to make to be succesfull. And the WOS described here is about this necessary approach.

  • Glen

    Good article Chris, I
    usually try for a 2:1 R:R and for that WOS is definitely needed. I try to
    follow the guidelines you have shown and only take the best setups.

  • ben

    The concept of wide open spaces is a very good one and
    indeed one that I need to use more often. I used this concept for a while after
    attending one of Scott Barkleys introductory sessions last year.He uses it all
    the time.This is one area that I hope to learn more from you as time goes on

  • Chris

    Thank you 🙂

  • Chris

    Hi Mike, happy to hear that you like it 🙂 thats great. Yes, you have a good point. Certainly you want to let winners run and it is easier to establish whether you have that space or not using the WOS principle. Hope that you catch many of those throughout the year 🙂

  • Chris

    Hi Darko, very happy to hear this! Glad that you think the concept will help. I certainly agree that the visual concept helps with understanding potential space in the Forex within multiple S&R levels. Let me know how you get along with using it. Be careful that you primarily use the 2 time frames higher than your trend chart (otherwise you would have too many levels on the chart).

  • Nice article

  • Mike

    I like this concept Chris. For me, I would be prepared to let my trade run rather than taking profits earlier. If you can get a couple of these in a year and let them run you should have a very profitable year.

  • Darko

    2) In my first homework I just pointed out to me a big problem as I have
    no idea how long the price can go in one direction. Did not know the
    concept of WOS.I believe that this discovery will have a very positive
    effect on my future trading, at least for two reasons: -It will help me
    in the objective assessment of the current market conditions, real
    opportunities to get into the market, and second, for me, more important
    to me get a more realistic
    end of the trading range and its profitability.

  • Chris

    Hi Greg! Thanks for the feedback! You are indeed correct that the concept is best used for discretionary strategies. It could also be interesting to let compare the results of your mechnical system (without intervention) to the results of the same system but with manual take profits using WOS.

  • Chris

    Hi Laura! Thanks for the feedback! Happy to hear that the WOS concept makes things more clear for you. I like your idea of the picture that shows the highway with heavy traffic, – great visual tool! 🙂

  • Greg

    The
    wide open spaces concept provides an important visual analysis to the current potential
    set up that should not be ignored. I would like to incorporate this concept in
    my trend following strategies but this is a discretionary tactic that is
    difficult to implement for a mechanical system.

  • Laura

    Great article! I liked how you translated complicated numbers and multiple concepts into a more visual experience with the idea of “wide open spaces”. It gave me the mental picture of being on a highway with heavy traffic, when suddenly the lane in front opens up and there’s clear road ahead! Thanks for this great concept!